August 7 2014

In the trading room today: What’s Next for the EUR after the ECB Meeting? Following the European Central Bank and the Bank of England monetary policy meetings, we continue to focus on the EUR and the GBP and explore what might be the next moves for these two currency majors against the USD, we analyze the range in the EUR/USD currency pair, we keep an eye on a support area for the GBP/USD pair, we take a look at the bounce of the USD vs JPY, we highlight the market’s reaction to the European Central Bank and the Bank of England monetary policy announcements and the U.S. Jobless Claims, we discuss new forecasts from Bank of Tokyo- Mitsubishi and Morgan Stanley, and prepare for the trading session ahead.


The Bank of England kept rates on hold at 0.5% and there was no change at the ECB, against a backdrop of weak German industrial output and Italy’s slide back into recession. TLTRO still on track to be rolled out later this year by the ECB…


Powered by article titled “UK interest rates on hold at 0.5%; no change at the ECB – Business live” was written by Josephine Moulds, for on Thursday 7th August 2014 12.23 UTC

More reaction to Russia’s import ban…

The ECB has left rates on hold, as expected.

In June, the bank cut its main refinancing to a record low of 0.15 per cent and put its deposit rate in negative territory, charging banks 0.1% on a portion of their reserves parked at the bank. It also launched a new ultra-cheap, four-year loan program, dubbed TLTROs, to be rolled out later this year.

RBS points out that market opinion on when rates will rise has shifted forwards since the beginning of the year…

But wage growth in the UK is amazingly low compared with the 40-year average.

Chris Williamson at Markit says it’s all about when wage growth starts to pick up.

If pay starts to rise in coming months, the first rate hike looks likely in November. Otherwise, any tightening of policy can wait until next year.

The British Chambers of Commerce is banging the drum for the MPC to sit tight.

The MPC made the right decision to keep interest rates and quantitative easing on hold. The UK’s economic recovery remains on track but is still facing challenges and this is not the time to put it at risk with premature rate increases. The current calls for higher rates, particularly while wage pressures are still weak, are unjustified. Official figures show that a large number of people are working part time because they are unable to find a full time job – refuting the view that there is no spare capacity in the economy.

Captial Economics is betting on a rate rise in early 2015, saying:

The key point is that the absence of inflationary pressure is likely to mean that the MPC will be able to raise rates only slowly over the next few years.

The reaction is flooding in about the Bank of England decision to keep rates on hold. James Knightley at ING Markets said:

Given we don’t expect any significant loss of momentum for the UK economy over the rest of the year we favour a November rate hike from the BoE with very slow and steady additional tightening of perhaps 25bp per quarter thereafter.

He expects to see one, possibly two members of the MPC having voted for a rate hike at today’s meeting, but we won’t find that out until the minutes are released on August 20.

Howard Archer at Global Insight:

No change in interest rates; No Bank of England statement; No surprise. A spike in consumer price inflation to 1.9% in June from 1.5% in May, ongoing appreciable falls in unemployment and further robust GDP growth of 0.8% quarter-on-quarter in the second quarter are supportive to the case for raising interest rates before the end of 2014.

However, ongoing very low earnings growth and some signs that growth could be losing a little momentum (notably, recent weaker news on the manufacturing sector as well as a dip in consumer confidence in July and softer retail sales in June) support the case for the Bank of England delaying any interest rate hike until 2015.

On balance he settles for late 2014.

The Bank of England has kept rates on hold at 0.5%. We’ll find out if there was any split on the voting in two weeks time when they release the minutes.

Tesco has been downgraded to just two notches above junk by Standard & Poor’s. The credit rating agency says the UK’s biggest supermarket is suffering from “persistently high market competition” and “will continue to see a trend of weaker profitability and top-line pressure”.

It downgraded the retailer’s debt one notch to BBB, with a negative outlook. The analysts said:

In a trading update which accompanied the appointment of its new CEO, Tesco has stated that because current trading conditions are more difficult than it anticipated, its sales and trading profit in the first half of the year are less than it expected.

The negative outlook on Tesco reflects our view that the lower profitability could lead to further deterioration in credit metrics, beyond the levels we consider adequate for the current ratings.

The European Commission has responded to Russia’s import ban announcement. A spokesman said:

The European Union regrets the announcement by the Russian Federation of measures which will target imports of food and agricultural products. This announcement is clearly politically motivated.

The Commission will assess the measures in question as soon as we have more information as to their full content and extent. We underline that the European Union’s restrictive measures are directly linked with the illegal annexation of Crimea and destabilisation of Ukraine. The European Union remains committed to de-escalating the situation in Ukraine. All should join in this effort.

Following full assessment by the Commission of the Russian Federation’s measures, we reserve the right to take action as appropriate.

The markets react predictably to Russia’s erratic behaviour. The price Russian companies will now have to pay to borrow money on the international markets has shot up.

Yields (effectively the interest rate) on Russian corporate bonds are now at 7.2%, compared with 5.2% for corporate bonds across emerging markets as a whole.

Power company Drax has lost its court of appeal ruling against the government, meaning one of its power stations will not be eligible for a lucrative subsidy.

The company is in the process of converting Britain’s largest coal-fired power plant to burn biomass, which is heavily subsidised. In December, the government said plans to convert two of its units would be eligible for subsidy contracts. But in April ministers unexpectedly disqualified one of the units, claiming it was ineligible.

The shares are down 11% now, after Drax said it would not appeal the decision.


The Russian import ban is largely futile, says the Economist.

German submarines sank merchant shipping in both world wars to stop Britain from importing food. Russia presumably imports food from Europe because it is cheaper or of better quality; diverting resocurces to produce food at home will be less economically efficient.

And what happens if they buy the food from Latin America or Asia? Well, those Latin American and Asian producers are currently selling the food to other non-Russian consumers. So those consumers will simply buy European and American goods themselves.

It notes that not all sanctions are so easily got round. Russia could cut off gas exports to Europe but that would mean Russia would not get paid, making it another potential own goal.

The main cost to Russia, as the column pointed out a couple of week ago, is that its erratic actions put off international investors, leading to lower asset prices and a higher cost of funding. In stockmarket terms alone, this effect is a trillion dollars. Impoverishing investors and making food more expensive; it’s not an inspiring platform.

There Bank of England might not be expected to announce a rate change today, but it’s coming.

Some quotes from Dmitry Medvedev’s press conference, when he announced the ban on food imports from the west. He said:

There is nothing good in sanctions and it was not an easy decision to take, but we had to do it.

Medvedev also threatened a series of further counter-sanctions, including a proposal to ban European and American airlines from flying over Russia’s territory.

It doesn’t mean that they’ll be adopted, but they are on the table.

The government was also “potentially ready” to introduce protective measures in a number of industrial sectors including the automobile industry, shipbuilding and aircraft production, he said.


Greek unemployment eased slightly in May but it is still shockingly high. The country’s statistics agency said the jobless rate inched down to 27.2% from 27.3% in April. That is more than double the eurozone average of 11.6% in May. Joblessness remains a major issue in Greece, despite signs of recovery in the economy, which is expected to emerge from recession this year.


Companies are starting to feel the effects of the Russian turmoil. The world’s number two bottler of Coca-Cola drinks warned volumes would fall for the rest of the year, citing a “sudden deterioration” in Russia, its biggest market.

It said volumes fell by a low single digit percentage in the second quarter, the first decline in 11 quarters, saying the escalation of the crisis in Russia and Ukraine had affected consumer spending in the region.

Medvedev’s announcement confirms Putin’s comments yesterday, covered in my colleague Jennifer Rankin’s story. She writes:

Vladimir Putin has banned the import of agricultural goods from countries that have imposed sanctions on Russia in a tit-for-tat move that deepens the economic standoff between the Kremlin and the west.

In tacit recognition that Russian consumers will bear the cost of the import ban, the decree also instructs officials to come up with measures to stabilise commodity markets and prevent food price rises.

These bans from Russia will start from today and will last a year.

Russia will ban transit flights for Ukranian airlines via its territory. It is also mulling a ban of transit flights for EU, US airlines to Asia-Pacific reigons.

There are lines coming through on the wires on Russia’s retaliatory measures to sanctions.

Prime Minister Dmitry Medvedev says Russia will ban fruit, vegetable meat, fish, milk and dairy imports for the US, EU, Australia, Canada and Norway.

Adidas, the world’s second-biggest sportswear firm, cut its profit for 2014, saying it would increase spending on marketing and an expansion of its own-run stores a week after it issued a profit warning.

Chief executive Herbert Hainer said: “Missing our goals is something we take very seriously and we definitely reflect critically on”.

The company says Russian turmoil has hit trading: it now plans to open only 80 stores in Russia this year and next, down from 150.

Rates are expected to be kept on hold at 0.5% when the Bank of England announces its policy decision at 12 noon. Samuel Tombs at Capital Economics says:

Although the Monetary Policy Committee (MPC) appears to have edged closer to raising interest rates over the last few months, it would still be a major shock if it raised them at its meeting today. And while the strength of the latest activity surveys suggests that the minutes later in the month may show that the vote was split for the first time since July 2011, the recent fading of momentum in house prices, downward trend in inflation and sluggish pay growth all suggest that the MPC will probably still wait until early next year to raise rates.

It is the first meeting for Nemat (Minouche) Shafik, who ups the number of women on the nine-strong committee to two. Kristin Forbes, a former economic adviser to George Bush, broke the all-male stranglehold on interest-rate setting in the UK when she became a member of the committee last month.

Markets are looking more stable this morning after yesterday’s rout.

  • FTSE 100 down 0.2%, 15 points at 6621
  • Germany DAX down 0.5%
  • France CAC 40 down 0.25%
  • Spain IBEX down 0.8%
  • Italy FTSE MIB down 0.14%

Christian Schulz at Berenberg bank says Putin, not inflation, is the real issue at today’s ECB meeting.

Another major escalation of the troubles in eastern Ukraine could spread the negative confidence effect from core European exporters to the wider economy. If Russian tanks roll westwards into Ukraine, the so-far shielded consumer confidence could take a hit even in far-away Iberia. The ECB will stand ready to act decisively in such circumstances, even deploying quantitative easing as a last resort. So far, however, Putin’s impact on the Eurozone has been mild.

The ECB, which has in the past cancelled its August meeting, is not expected to make any major announcements today.

But economists are intrigued to hear what ECB president Mario Draghi has to say about last week’s dreadful inflation data. Robert Kuenzel of Daiwa Capital Markets says:

Draghi certainly has some explaining to do why euro area inflation saw yet another dip in July to a new 4½-year low of 0.4%. While the technical answer is known (base effects from energy prices), the ECB’s repeated overestimating of the inflation path this year may be starting to harm its credibility. But it is far too soon for the ECB to even consider a policy change, given that the latest flagship initiative TLTROs only starts next month. So the Governing Council will stick to their guns and simply hope for the best.

In the UK, insurance groups Aviva and RSA have posted upbeat results, amid efforts to turn their businesses around. My colleague Julia Kollewe reports:

Britain’s largest general insurer Aviva made an operating profit of £1.1bn in the first six months of the year, up 4%. Overall new business climbed 9% to £453m, although the company reported a 41% reduction in the value of new business from annuities in the UK following the sweeping pension reforms announced in the March Budget. The chancellor scrapped rules that force pensioners to buy an annuity. “We suspect there are further falls to come,” said Eamonn Flanagan, analyst at Shore Capital.

Aviva boss Mark Wilson said: “Aviva remains a work in progress, and these results are a step in the right direction.” The company reduced debt and made more cost savings.

Under Stephen Hester, the former Royal Bank of Scotland boss, rival RSA moved back into the black in the first half with a £69m pretax profit, against a £250m loss a year ago. Hester plans to resume dividend payments at the full year after scrapping payouts in February.

Hester took the helm in February after Simon Lee quit in December in the wake of three profit warnings and an accounting scandal in Ireland. Hester took immediate action, tapping shareholders for cash in a £775m rights issue while also raising over £600m from selling assets in eastern Europe, Canada and China.

Hester said: “RSA’s action plan is going well. Since announcing it five months ago, we have made strong progress improving strategic focus and capital health.” He added: “While first half profits are modest, they reflect further balance sheet and reserve clean-up as well as above normal weather costs.”

Several analysts described the RSA results as messy, however. There were further losses in Ireland and analysts at Citi were disappointed by RSA’s underwriting profit of just £2m.

There’s better corporate news out of Germany this morning. Commerzbank said net profit more than doubled in the second quarter, boosted by a stronger performance at its retail unit and lower overall loan-loss provisions.

Germany’s second biggest bank said it would speed up the clean up of unwanted assets to support the turnaround of the bank, which was bailed out of the financial crisis by the Germany government.

Deutsche Telekom beat forecasts with its quarterly report – EBITDA excluding special items increased to €4.43bn, compared with forecasts of €4.35bn – after a rise in earnings in the US offset investments in its German networks.

The weak German data (see below) suggest the eurozone’s largest economy stagnated or possibly shrank in the second quarter, say economists. Carsten Brzeski of ING Bank blames the slowdown on domestic problems, rather than the crisis in Ukraine.

Contrary to often voiced views that the German economy has suffered severely from the ongoing geopolitical tensions, the probable stagnation was rather home-made. Particularly, the construction sector has become a drag on growth. The expected downturn after the weather-driven boom in the first quarter has been worse than expected.

He expects construction and private consumption, on the back of low interest rates, the strong labour market and higher wages, to drive growth in the second half of the year; but notes that geopolitical tensions and a bumpy recovery in the rest of the eurozone could hit exports.

The domestic fundamentals of the German economy remain sound and with the expected growth acceleration in the US and the UK at least some major trade partners could keep the German export engine running. However, recent data was a strong reminder that islands of happiness only exist in books and not in economic reality.

This morning, we’ve already had weak data out of Germany, fuelling fears that the industrial recovery in the eurozone’s biggest economy is running out of steam.

Industrial output rose just 0.3% from May. While that is the first increase in four months, economists were targeting a rise of 1.3%. Bloomberg reports:

The European Union agreed last week on its widest-ranging sanctions yet over Russia’s backing of rebels in eastern Ukraine and the Bundesbank has cited geopolitical tensions as contributing to a probable stagnation of the economy in the second quarter. Factory orders fell the most in more than 2 1/2 years in June and sentiment surveys have plunged in Germany, Russia’s biggest trading partner in Europe.

“It’s still too early to say that tensions with Russia are already weighing on hard data,” said Andreas Rees, chief German economist at UniCredit MIB in Frankfurt. “But psychological headwinds are increasing and we have to see whether this pessimism will become persistent.”

German industrial output


Over night, it emerged that Bank of America may have agreed to pay what would be the largest settlement with the US justice department as a result of the financial crisis. AP reports:

Bank of America has tentatively agreed to pay between $16bn and $17bn to settle an investigation into its sale of mortgage-backed securities before the financial crisis, a source directly familiar with the matter said on Wednesday.

The deal with the bank, which must still be finalised, would be the largest Justice Department settlement by far arising from the economic meltdown. It follows earlier multibillion-dollar agreements reached in the last year with Citigroup and JP Morgan Chase.

The source, who spoke on condition of anonymity because the deal had not yet been announced, cautioned that some details still needed to be worked out and that it was possible the agreement could fall apart.

The European Central Bank holds its monthly press conference today against the backdrop of a worsening economic climate in the eurozone and rising tensions with Russia.

ECB president Mario Draghi is not expected to announce any change in policy, given that the new stimulus announced last month has not even started yet. But, as Michael Hewson of CMC Markets, notes:

Markets will be paying close attention to the press conference and in particular the ECB President’s views on what negative effects the situation in Ukraine is likely to have on the ECB’s economic forecasts for the euro area.

The Bank of England will also announce its policy decision later. There’s unlikely to be any change there but we may find out that some members of the monetary policy committee are edging towards a rate rise when the minutes are released in two weeks time. © Guardian News & Media Limited 2010

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